CA Estate Planning Blog

Friday, January 18, 2013

2013 Estate Tax & Gift Update

Once you’re worth more than a certain amount, your estate will have to pay estate taxes upon your death. Under the 2010 tax law, each spouse can transfer up to $5 million tax-free during life or at death. The tax rate for amounts transferred over the exemption was 35%.

If Congress had not acted, the tax-free amount would have been reverted back to $1 million per person and the rate for most estates would have gone up to 55%. This would have greatly affected the middle class by exposing them to the estate taxes. However, on New Year's Eve and New Year's Day, the Senate and the House of Representatives passed the tax law that made permanent the system that has been in effect for the past two years.

EXEMPTION?: $5.25 million per person

Congress did in fact act, and on January 11, the IRS announced that with the inflation adjustment, the estate tax exclusion amount for deaths in 2013 will be $5.25 million from the $5.12 million in 2012.


In 2011 ande 2012, the maximum tax rate was 35%.  If Congress did not act, the amount would have increased to 55%. However, with the new law, the estate tax rate for amounts transferred over the estate tax exemption was increased to 40%.


Yes, portability is still available for the surviving spouse. The new law has made portability permanent. This means that a surviving spouse can use the decedent spouse’s unused federal estate tax exemption, enabling them to transfer up to $10.24 million tax-free.

Wednesday, December 26, 2012

Hazards of Gifting Your Home to Your Kids

We see it all the time as parents get older, they decide that they want to give their kids their real estate before they pass on or put them on title as joint tenants. Usually the rationalize this decision by believing that gifting their property to their kids while they are alive will avoid estate taxes, help them qualify for government benefits such as Medi-Cal or simply to avoid probate.  While these lifetime gifts can accomplish these goals, there are significant negative consequences of doing such transfers including;

  • Loss of your home:  Often a parent who is still living in their home will gift it to their children.  Unfortunately by doing so, the home could be sold out from under them because of debt owed by their children or the children themselves decide to sell the property.
  • Loss of Stepped Up Tax Basis: One of the benefits of inheriting highly-appreciated property is that you get a 100% stepped up basis in that property.  In other words, whatever the property is worth when your parents pass on, is what the IRS considers you having paid for the property.  Thus when you sell the property, you will owe little or no capital gains taxes.  If you receive a property as a gift you get a carryover basis in the property (what your parents paid for the property) and thus when you sell the property you could have a large capital gains tax liability.
  • Gift Taxes:  Gift taxes are paid by the donor at the time the gift is made. If you give anyone more than $13,000 in a calendar year, you are required to report the transaction as a gift to the IRS.  During your lifetime you are allowed to give away 1 million dollars without paying the tax (45% of the value of the gift).  However, whatever amount of the exemption you use during your lifetime will be deducted from your estate tax exemption.  Thus if you give away 1 million dollars during your lifetime and pass on when the estate tax exemption is 3.5 million, you will only have a 2.5 million dollar exemption.  Every dollar above 2.5 million will be taxed at 45%.


Assuming there are no other compelling reasons to gift your homes to your kids, they typically will be much better off if you simply create a living trust or an irrevocable personal residence trust (to avoid Medi-Cal Estate Recovery Lien), transfer the property to the trust and then make their kids the beneficiary.  The property will goto their kids with minimal tax consequences and avoid the high cost and delays of probate.

Wednesday, November 14, 2012

Medi-Cal / Medicaid Eligibility

Although Medicaid eligibility rules vary from state to state, federal minimum standards and guidelines must be observed.


Medi-Cal will pay your long term care expenses if you have less than $2,000 in liquid assets (cash & securities).  However, for most seniors, qualifying for Medi-Cal is quite complicated and we can help show you how to qualify to as quickly as possibe for this benefit.


While Medicaid eligibility with respect to long-term care was not difficult in the past, there has been a steady drift towards more complex and restrictive rules, the latest being the Deficit Reduction Act of 2005 which went into effect in 2006.  These changes have resulted in complex eligibility requirements for those in need of Medicaid benefits.  It’s no longer as easy as reviewing one’s bank statements.  There are a myriad of regulations involving look-back periods, income caps, transfer penalties and waiting periods to plan around. 
Our law firm has the experience and the expertise to help avoid the financial ruin associated with the high cost of long-term care.  Contact us today to start the process of understanding the issues surrounding Medicaid eligibility and to implement the planning and application process. 


Monday, November 12, 2012

How to Pay for Long Term Care

As a senior approaches the twilight of their lives, the issue of paying for long term care becomes ever looming. Unfortunately the odds are fairly high that most seniors will end up in some form of assisted or skilled care. The high cost of long-term care has made planning a critically important issue for most middle class seniors and their families. Sadly, many of them are unprepared for the significant financial burdens it places on their family’s hard earned savings.  Financial devastation looms large for a family facing ongoing care at a rate of $10,000 or more per month.
While some seniors are able to afford private pay care, the cost of long-term care will wipe out savings of all but the wealthiest families in a matter of years.  Those who have planned ahead by purchasing long-term care insurance have a degree of certainty and peace of mind, knowing that they have a lesser need to rely on other sources in the future.  Unfortunately, many can’t afford the high cost of long term care insurance or worse, because of age of medical condition cannot qualify for long term care insurance altogether.  If you do have long-term care insurance, you should be aware of what your policy covers.  Many policies have high deductibles or provide for only a short period of care in facility.  In fact, many who have long-term care insurance still have to resort to Medicaid to pay for their care.

Medicare is available to help at the onset of any medical issues but only cover long term care issues for a few months.  After which your options to pay for in home, assisted or skilled (nursing home) care are

  • Self Insurance:  Using your life savings to pay for skilled care which typically costs around $7,000 per month.  However, cash clients will have the most options available to them when it comes to choosing a care facility.
  • Long Term Care Insurance:  If you were fortunate enough to be able to afford this insurance when you were 50 or 60, such insurance can go a long way to providing the senior the funds they need to pa for long term care.
  • VA Aid and Attendance Pension Benefit:  If you or your spouse were a veteran who served during a war era (ie WW II, Korea, Vietnam etc), you can qualify for long term care benefits of up to $2,000 per month tax free.  Financially qualifying for this benefit is fairly straightforwrd but may involve shifting some of your assets to an irrevocable trust.
  • Medi-Cal/Medicaid:  The safety net available to financially qualified individuals.  Medi-Cal/Medicaid is a joint federal-state program.  Medicaid provides medical assistance to low-income individuals, including those who are 65 or older, disabled or blind.  Medicaid is the single largest payer of nursing home bills in America and serves as the option of last resort for people who have no other way to finance their long-term care.


Friday, November 9, 2012

Why Young Families Need to Create an Estate Plan

As the father of two young children, I am acutely aware of how vulnerable my children would be if something happen to me and/or my spouse.  My children are completely dependent on us for the next 20 or so years.Creating an estate plan is not just for the elderly or the wealthy, anyone with children needs to create an estate plan.   Not only do I need to decide who would take care of my children but also how they will be financially supported.  Here's how a good estate plan will protect your family and your assets.

  • Guardianship: First and foremost your plan will nominate a back up guardian in your will for your children if something should happen to the parents.  If you don't have a will, a judge will make the decision for your kids and you will not have any input.
  • Asset Preservation:  By having a properly prepared and funded estate plan, you can ensure that as much of your assets that you currently have will be available to support your children.  By creating and funding a Living Trust, you can minimize the impact of legal fees and expenses on your assets.
  • Income Replacement:  One of the primary issues if something should happen to the wage earners of the family is that their income will be lost forever.  The money earned to pay for food, clothing, shelter and education will need to be replaced.  Evaluating how much life insurance your family needs if something should happen to you is a critical to the financial protection of your family. 
  • Inheritance Planning:  Without an estate plan, your children could inherit all your assets when they turn 18.  For most people, 18 is too young to handle that kind of responsibility.  If you want to ensure that the assets you have worked so hard to earn are not wasted, you need to have an estate plan to regulates when and how your children will receive your assets.

It is never too soon to contact your local estate planning attorney to make sure your family and assets are protected.

Wednesday, October 24, 2012

Take Control of Your Assets

Take Control of Your Family and Assets with an Estate Plan

Estate planning is mostly about you making choices regarding the welfare of your family and management of your assets.  If you don’t have an estate plan, the government will be making these choices for you, even if you are only incapacitated and most people do not want the government controlling their lives.  Here are some examples of the decisions the government can make on your behalf if you don’t document your choices;

  1. They can place your children with child protective services or foster care.
  2. They will decide who will raise your children.
  3. They will give your children all of your assets at age 18.
  4. They may cause your estate to hire a probate attorney who will charge your heirs tens of thousands in attorneys fees
  5. They can tie up your assets for one or more years.
  6. They can choose who will manage and spend your assets even if you are alive.
  7. They have an inheritance plan that may give your assets to someone whom you do not like.
  8. They can charge your heirs an estate tax of 35%-55%

A properly drafted and executed estate plan can ensure that you will have input on these important decisions even if you are incapacitated or have passed on.

Tuesday, April 5, 2011

Irrevocable Life Insurance Trust [ILIT]


An Irrevocable Life Insurance Trust (ILIT) is an irrevocable trust that provides a means of avoiding estate taxes on life insurance proceeds, while providing a benefit for your spouse and/or children. 


Any individual whose estate may or will have an estate tax liability should consider an ILIT to avoid having life insurance proceeds included in the estate and causing or increasing estate tax liability.
An ILIT avoids estate taxes on life insurance proceeds by taking life insurance out of the taxable estate. Life insurance is considered part of the taxable estate when the following occurs: (1) Upon your death, the life insurance proceeds are paid directly or indirectly to your estate; or (2) When you were alive, you held any ownership interest in the life insurance proceeds. Ownership interest includes the right to change a beneficiary, surrender or cancel the policy, or borrow against the policy. If you leave the proceeds to anyone other than a spouse, such as a child, parent, or friends, then your estate will be taxed. If you leave the proceeds to a spouse, then your estate will not be taxed, but your spouse's will be.
An ILIT takes the life insurance out of the taxable estate by placing the life insurance into an irrevocable trust, then naming another individual (not yourself) as the trustee. A life insurance policy placed into an ILIT is considered to have no owner, therefore it is not considered part of your estate. The ILIT is also considered the beneficiary of the life insurance proceeds, which keeps the proceeds out of your, your spouse's and your children's estates.  After the insured dies, the Trustee will invest the proceeds of the trust and administer the trust for its beneficiaries. 


Utilizing an ILIT can: (1) help avoid estate tax liability; (2) increase the size of your estate without increasing your estate tax liability; (3) provide liquidity to pay off liabilities or tax obligations without selling other assets; (4) allow for transfers out of the estate with minimal or no gift tax consequences; (5) protect beneficiaries from creditors; and (6) provide an ongoing management of assets under the terms of the trust.


There are two ways to set up an ILIT: (1) You can purchase a life insurance policy in the name of the trust; or (2) You can transfer an existing life insurance policy into the trust. 
It is preferrable to purchase a life insurance policy in the name of the trust rather than transferring an existing life insurance policy into the trust.  Transferring an existing policy into a trust triggers a three-year survival rule, whereby the original policy owner must survive the date of transfer by three years or the life insurance proceeds will be included in the decedent's estate for estate tax purposes as if the transfer never occurred. 
If the insured has a spouse, the ILIT should contain a fail-safe clause, providing that if the insured/transferor dies within three years of the transfer of any policy to the ILIT, then the proceeds of such a policy will be held separately under the ILIT and administered for the surviving spouse in a way that will qualify for the estate tax marital deduction.  This arrangement will render those proceeds tax free if the insured dies within three years of the transfer and is survived by is spouse. The trade-off is that whatever is left of these proceeds will then be included in the estate of the surviving spouse.
It is important to fund the life insurance policy in a manner that will render the policy premium payments exempt from the federal gift tax.   
If you transfer securities or cash to the trust so that the trustee will have income to pay the premiums, the full value of the securities or cash payments would be considered a taxable gift and you would be liable for the gift tax if the value of either exceed the annual $13,000 exemption per trust beneficiary. 
However, you may be able to exclude these premium payments from counting towards the gift tax exemption by setting the life insurance trust up as a Crummey Trust.  This trust focuses on the requirement that the $13,000 annual gift tax exemption applies only to gifts in which the beneficiary has a "present interest," or the right to immediately access and spend the gift (although some restrictions on access are permissible).  The Crummey Trust gives the beneficiaries a present interest in the premium payments by providing the beneficiaries with the opportunity to withdraw the amount of the premium payment for up to thirty (30) days after it is made.  
Parents wishing to set up this type of trust for the benefit of their children have some assurances that the children will not empty the trust and run away with the funds. The beneficiaries can only withdraw the most recent gift payment, leaving the remainder of the trust intact.  And if a parent cannot convince a child to give up his right to withdraw funds, the parent could stop making payments to the trust, leaving the remaining funds in the trust to grow until the final dispersion. 
The Generational Skipping Transfer Tax (or GSTT) is a federal tax that is imposed on outright gifts and transfers in trust to beneficiaries who are either (a) related to and one generation younger than the donor (i.e. grandchildren), or unrelated to and more than 37.5 years younger than the donor.  The GSTT is imposed on the beneficiaries of these gifts or transfers (also referred to as 'skip persons') to ensure that taxes are paid at each generational level, even when a donor establishes a trust to allocate his assets to future generations.  The GSTT takes effect when a skip person receives an amount that exceeds the $1 million tax credit (in 2011); the overage is then taxed at a flat rate of 55%. 
An ILIT can be used to leverage the insured’s GSTT exemption, since the exemption will be based on the premiums, not on the death benefit or the cash value of the insurance. Total premiums cannot exceed the grantors' available GSTT exemptions. As long as the GSTT exemption covers all of the lifetime gifts made to the trust, all trust assets, including the death benefit from the life insurance, will be exempt from generation-skipping transfer taxes. If the ILIT is properly drafted and administered, the death benefit proceeds should also be free from income and estate taxes.

Wednesday, March 23, 2011

2011 Estate and Gift Tax Update

2011 Estate Tax Update
In December of 2010,  President Obama has reached a deal with Republicans on the status of the estate tax for 2011 and 2012.  The highlights of the bill include

  • The estate tax exemption for individuals is now 5 million dollars.  This is up from 3.5 million in 2009 and $600,000 in 2000
  • The lifetime gift tax exemption is now 5 million dollars.  This is up from 1 million dollars in 2010
  • The estate and gift tax rate is now 35%.  Thus any estates or gifts larger than 5 million dollars will be taxed at a rate of 35% for every dollar above the 5 million dollar threshold
  • Portability of the estate tax exemption: Married couples may not need to split up their estate when one spouse passes in order to take advantage of both spouses estate tax exemption.  In other words if you and your spouse are worth ten milllion dollars, the surviving spouse can still directly inherit the deceased spouses share of the estate without having to worry about not taking advantage of the deceased spouses's exemption.  When the surviving spouse passes, their estate can now not only use the current exemption but also the unused portion of the estate tax exemption not used by the deceased spouse to whom they were last married.
  • This new estate tax law will expire at the end of 2012 unless the government renews it and if they fail to do so, we will go back to the 1 million dollar exemption.

While I would not expect the estate tax exemption to fall after 2012, no one has an idea exactly what will happen after 2012.  With the rising deficit and sluggish economy it is possible that the estate tax exemption could fall after 2013 although it is more likely that they would increase the tax rate rather than reduce the exemption. With that in mind, it is still imperative that married couples make sure that their living trust is set up in such a way to minimize the impact of the estate tax regardless of what the exemption amount turns out to be.  In addition, those couples who set up their trusts when the estate tax exemption was $600,000 should also have their trusts reviewed as they may contain cumbersome provisions that are no longer necessary.

Tuesday, January 18, 2011

Summary of Estate Tax Law 2009-2011

Federal Estate Taxes are a subject of much controversey and as of this writing in a state of flux.  In 2001, a new estate tax law was enacted with a goal of eventually eliminating the estate tax beginning in 2010. 2010 is the last year of the law and if a new law is not enacted by congress the 2001 law will "sunset" and the pre-2001 estate tax system will be re-enacted.  Most estate planning commentators expect some version of the 2009 law to be in place sometime in 2010 and be retro-active to January 1, 2010.  Here's a summary of the estate tax laws for 2009, 2010 and 2011

2009: Each person's estate receives a 3.5 million dollar exemption from estate tax.  Every dollar in your estate above the 3.5 M exemption will be taxed at a rate of 45%.  Any property inherited(other than any tax deferred accounts) by will or trust will result in a stepped up basis for the heir (ie The value of the property when the person passed on will be deemed to be the price the heir paid for the property when they sell it).

2010: There is no estate tax.  However, any property inherited by will or trust will now result in a carryover basis( whatever the person who passed paid for the property plus the cost of capital improvements) being assumed by the heir.  Thus if the heir sell the property they will pay an income tax on the price the property is sold for less the carryover basis.  There is a provision of a 1.3M stepped up basis for each person's estate and a 3M stepped up basis for the surviving spouse.  If this law prevails, determining the carry over basis will be a nightmare.

2011 & 2012:  Congress enacted a temporay estate tax law where the estate tax and gift tax exemptions have risen to 5 million dollars.  The top estate tax rate is now 35%.  If a new law is not enacted by 2013, the exemption levels may return to 1 million dollars and a 55% tax rate.

Please feel free to contact me at 949.873.7273 or in the "Contact Us" box  if you have any further questions or would like to schedule an appointment.

Sunday, March 21, 2010

2010 Estate Tax update

Due to the inaction of Congress at the end of 2009, we enter 2010 with the estate tax law in a state of flux.  We have new estate tax law that went into affect at the first of the year that will likely be superceded by a new estate tax law sometime this year.  In all likelihood, the new estate tax law will look very much like the estate tax law we had in 2009. 

 In 2009, the House of Representatives (supported by most Democrats and Obama) have passed a law with a 3.5 million dollar estate tax exemption, 45% top tax rate and continued stepped up basis for inheritied property.  The Senate meanwhile passed a bill (supported by the Republicans and 10 Democrats) with a 5 million dollar exemption, 35% top tax rate and continued stepped up basis on inherited property.  Unfortunately the two houses never were able to reconcile the two bills and probably won't get to it until healthcare reform is resolved.  However, I would expect the new law to be within the ranges of these two bills.

Confused?  The bottom line is that regardless of what happens to the law relatively few Americans will affected by these laws.  Thus most estate planners are advising their clients not to do anything with regards to their estate planning documents until a long term estate tax is put in place by Congress.  I continue to advise my client of high net worth to assume a 3.5 million dollar exemption. We assume this will happen in the coming months but inaction by Congress is always a possibility( which we create even more havoc as the current law will expire and the old system of  a 1 million dollar estate tax exemption and a 55% tax will be the new law). 

If you have any further questions, please feel free to contact me anytime.

For a summary of the estate tax laws for 2009, 2010 and 2011, click here.

Monday, March 30, 2009

The Hazards Using a Will and Joint Tenancy as Your Estate Plan

If you have friends, family or clients that currently hold title to property in California as Joint Tenants, you will want to urge them to change the way they have their property titled.  While joint tenancy has the advantage of immediate transfer of ownership to the survivor upon the passing of one of the joint owners, joint tenancy can also result in significant increase in income tax liability.  Also, if they still have real estate titled as joint tenants, it is a pretty good indication that either they have not done any estate planning or have done estate planning and have failed to change the title of the property into their living trust.

Under current law, if you inherit property, your tax basis in the property will be stepped up to market value as of the day the owner died.  In other words if the property is worth $500,000 when you inherit it and then you sell it for $500,000, you will not owe any income or capital gains taxes.  If the property is held as community property , this scenario is also true as the surviving spouse gets a stepped up basis on both halves of the community property.
However, if a property is held as joint tenants, the surviving owner(s) only get a stepped basis on the ownership of the deceased owner.  Thus if a couple pasy $200,000 for a property, one spouse passes when the property is worth $500,000, the surviving spouse's basis in the property will be stepped up to $350,000 ($100,000 of original basis plus deceased spouses stepped up basis of $250,000).  If the spouse then sells the property for $500,000, taxes may be owed on the $150,000 profit.  If the couple had title the property as community property, the surviving spouse would have received a stepped up basis of $500,000 and then would not have owed any taxes on the sale of the property.
In California, married couples now have the option to hold title as community property with the right of survivorship.  This form of ownership offers the tax advantages of commnity property with the immediate transfer of ownership of joint tenancy.  There is no good reason for property owners to continue to use joint tenancy.  Better yet. when my firm drafts a Living Trust for our clients, one of the documents we create for married couples is a marital property agreement which will convert all joint tenant titled properties into community property once the property is retitled into the name of the trust.  Thus property owners will be able to avoid probate and potentially reduce the tax liability of their heirs.

One additional reason not to rely on joint tenancy to serve as your estate plan is that you may not want the surviving spouse to own the property 100%.  If you intend that your share of the community property including your real estate go to your children, there is no assurance that your spouse will include your children in their estate planning.  This is especially an issue when you have children from a prior marriage for whom you would to pass on your share of the property to.

If you have any questions, please feel free to contact us at 949.242.4514 or use the contact us link to the left.

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